THE economic jargon word of the week - and from the way Kevin Rudd is talking, the whole year - is ''productivity''. It's a word with a lovely, hardworking, prosperous sound to it, even though a lot of people are vague on what it means and even vaguer on how you increase it.
In all the speeches he's been making about Treasury's latest intergenerational report, Rudd has been lamenting that, whereas productivity improved at the rate of 2 per cent a year during the 1990s, it slowed to a rate of just 1.4 per cent in the noughties.
This was a familiar theme of his while he was in opposition and he's repeatedly blamed the Howard government for the slowdown.
Rudd is arguing that to prevent a looming slowdown in the rate at which we're getting richer, we need to boost the rate of productivity improvement back to the 2 per cent average we achieved in the 1990s.
I suspect some people think productivity is just a $10 word for production. It isn't. Rather, it has to do with the efficiency of production. It's the ratio of the economy's output of goods and services to its inputs of labour and physical capital.
We usually focus on the productivity of our labour, which can be determined simply by dividing gross domestic product - the value of all the goods and services produced during a period - by the number of hours worked during the period.
The productivity figures Rudd's been quoting are for the improvement in productivity of labour. A lot of people assume that the way to improve our labour productivity is for everyone to work harder or longer.
No. Working harder might help a bit, but working more hours won't. Actually, the main ways to improve the productivity of labour are to give workers more machines to work with (a process called ''capital deepening'') or for them to benefit from changes economists usually lump together under the heading of ''technological advance''.
Late last year the Productivity Commission produced a submission to a parliamentary committee that sought to explain the slowdown in productivity Rudd keeps on about. However, it focused not on labour productivity but on a more sophisticated concept called ''multi-factor productivity''.
This is the growth in output you get that can't be explained by increased inputs of labour and capital. In a sense it's ''pure'' productivity improvement. It's the thing economists usually label as technological advance - although closer inspection reveals there's more to it.
Multi-factor productivity is improved by the achievement of economies of scale and by specialisation. It's increased by improvements in the allocation of resources and by the closing of old factories and the opening of new ones.
It's improved by better management practices and work arrangements. It's also improved by increases in ''human capital'' arising from education and training, which represent improvement in the quality of labour.
But the main component is technological advance: inventing products, producing better products or introducing better production techniques.
It's the continuous improvement in multi-factor productivity since the Industrial Revolution that's done most to make the rich countries rich and keeps them getting richer.
When you switch from Rudd's labour productivity to the Productivity Commission's multi-factor productivity you get a more refined version of the same story.
Multi-factor productivity has improved at the rate of 1.1 per cent a year over the past 40 years, which is about average for the advanced countries.
In the second half of the 1990s, however, the rate leapt to 2.3 per cent a year. But it fell back to 1.1 per cent in the early noughties, and between 2003-04 and 2007-08 it averaged a worrying minus 0.2 per cent.
The commission argues that the productivity surge in the late 1990s can't be explained by higher skill levels in the workforce or by the advent of the information and communication technology revolution. It gives the credit to the delayed effect of the many micro-economic reforms undertaken by the Hawke-Keating governments, designed to increase the competitive pressure in markets.
But how does it explain the much weaker productivity performance during the noughties? Well, the commission doubts whether inadequate investment in public infrastructure has much to do with it (there goes one of Rudd's claims) and rejects the notion that much of the decline can be explained by inadequate spending on education and training (there goes the other). It notes that spending on research and development was particularly strong during the noughties.
Rather, it says, about 70 per cent of the below-average performance can be explained by particular problems in three major industries.
Productivity has deteriorated significantly in the mining industry, partly because some coalmines and oil rigs are running out of good-quality deposits, but mainly because of huge spending on new mines and facilities that have yet to start producing.
Productivity in the electricity, gas and water sector has deteriorated because there's been a lot of new investment but - particularly in the case of water - reduced output because of the drought. Finally, productivity in agriculture has been hit by extended drought.
Fortunately, most of these problems are temporary. But, either way, they can't be blamed on the Howard government.
